Standing Committee B

[Mr. James Cran in the Chair]

Pensions Bill

Nigel Waterson: On a point of order, Mr. Cran. As the Committee hurtles towards the Easter recess, I think it only fair to give the Minister an opportunity to update the Committee on the Government's progress with their new clauses and amendments on a range of important and serious issues—but as we listen to the Minister's answer, we must, of course, keep today's date in mind.

James Cran: Your point of order has, of course, nothing to do with me, Mr. Waterson, but doubtless the Minister has heard it.Clause 136 Initial levy

Clause 136 - Initial levy

Nigel Waterson: I beg to move amendment No. 184, in
clause 136, page 83, line 39, after 'regulations', insert 
 ', which shall be no earlier than the day on which the basis for calculating the risk-based levy in the first financial year after the initial period has been published.'.
 Moving amendments in this Committee sometimes feels like serving in tennis against someone without a racket.

Malcolm Wicks: You cannot be serious.

Nigel Waterson: The jokes do not get any better. I see that the Minister is in a frisky, pre-Easter mood; he obviously has a new team of gag writers, even if he does not have a new team of draftsmen.
 We have reached an important and meaty part of the Bill, which deals with how the levy is to work. A range of amendments have been tabled to clause 136, which deals with an animal called the initial levy, whose purpose is to bridge the gap between the coming into existence of the pension protection fund, on a challenging timetable—to use the ministerial words—and the ability to introduce a risk-based levy, which we will talk about in more detail in due course. In other words, there will be a flat-rate levy in the opening period of the PPF's operation. 
 It is important to recognise that we are in a dynamic situation. As we consider the Bill in Committee, pension funds are still getting into difficulties—quite apart from the funds that may be staggering on only to fall into the arms of the PPF as soon as it is up and running. In the past few days, we have heard the worrying and serious news of the Mayflower bus maker company, which called in the administrators yesterday. Its retirement scheme, which affects some 2,000 workers, has assets of £36 million, but its pension promises amount to a liability of £57 million. 
 That is another example of a group of workers who will fall through the cracks between where we are now and where we will be when the PPF is up and running. I do not want to repeat the arguments about how that problem could be dealt with or how compensation could be provided through unclaimed assets. However, we have yet to hear a satisfactory explanation of why unclaimed assets are available and usable for certain purposes set out in the Budget but not for this purpose. 
 There are significant arguments, some of which will be developed in later amendments, about whether it is sensible to start the PPF on a flat-rate levy. As a concession, the Government are proposing to claim only half the proposed levy in the initial stages. There is a whole raft of reasons why that might not be sensible, not least that the fund may not have sufficient resources to meet the claims in the early stages. Expert opinion suggests that quite a few claims will arise at the beginning of the PPF's life. 
 Amendment No. 184 approaches the issue from one direction; we shall consider amendments that approach it from other directions in due course. It would ensure that the regulations provided for in the clause, which start the application of the initial levy, would not come into effect any earlier than the day of publication of the basis for calculating the risk-based levy in the first financial year after the initial period. 
 This will be a theme of several mini-debates, so let me get the issue out in the open now: the Government are being foolhardy in starting off with a flat-rate levy. That would be extremely unfair on some companies, and may well not provide the resources to meet claims in the early stages. I can hear the Government's argument now: ''We want to get this in place in plenty of time—we want it up and running as soon as possible to help people in that situation.'' I understand that argument, but I simply do not accept it. 
 There are interim approaches that could be adopted. One of them would be to legislate in a measured, calm way—as the Government of the day did after the Maxwell saga—and seriously try to deal with the situation that people face, whether that is the case of the 60,000 Allied Steel and Wire workers, of whom the hon. Member for Cardiff, West (Kevin Brennan) speaks so eloquently, or the potential problems of the 2,000 workers in the Mayflower pension scheme. 
 We have set out how we think the parallel compensation scheme can be set up, but there are other views, and I will come to them in more detail in due course. The Association of Consulting Actuaries is also concerned about the fact that a risk-based levy will not be introduced from the outset. It says that one way of dealing with the problem would be to start by calculating the levy by reference to the existing minimum funding requirement. It says: 
''It is inevitable that the risk based premium cannot be totally fair as some schemes would be 'uninsurable'.''
 That is one approach. The MFR is at least a familiar concept, and it could well be used as an interim measure, so that we could start off with some element of risk built into the calculation of the levy. Those 
 seem perfectly sensible proposals for dealing with the interim situation. 
 I commend the amendment to the Committee, but it is only one way of dealing with the genuine concerns out there in the real world about the delay in bringing in the risk-based levy. I shall have quite a lot to say about that under other amendments.

Steve Webb: As the hon. Member for Eastbourne (Mr. Waterson) said, a whole group of amendments have been tabled to tackle the issue of the initial period, the initial levy, how it should be calculated and for how long it should apply. I shall restrict most of my remarks to some of other amendments to the clause.
 As I understand it, the hon. Gentleman's specific proposal is that if the initial levy is not risk based, we should at least be able to expect that the basis on which the risk-based levy will be calculated will be known at the outset. That puts the onus on the PPF to get moving and gather the information that it might need to calculate the risk-based levy. It could also encourage the Government to take a bigger role at the outset. I recognise that Ministers want the body to be at arm's length from Government to some extent, but as we are scrutinising the setting up of the fund, the earlier that we have sight of what sort of risk-based levy we might have, the better. We will talk about the nature of the levy at some length later. 
 There is an issue of accountability involved. Who will decide how the risk-based levy looks? The Committee and the House will decide what is to be included in it. The amendment goes slightly further than that, and says that the basis of the risk-based levy should be set out as soon as possible—indeed, before the whole thing gets going. Certainly, provided that that does not cause delay in getting the scheme up and running—none of us would want that—I have a lot of sympathy with what the hon. Gentleman suggests.

Malcolm Wicks: Good morning, Mr. Cran. Despite the date, we on the Government Benches are in serious mode, as usual. There are no jokers in our pack of Government amendments—but of course I cannot speak for all the amendments before us today; I do not have that authority.
 I draw some comfort from the fact that there is no fundamental challenge to the concept that the PPF should be funded by a levy. Moreover, there is consensus that it should have a risk-based element, and I suspect that there is consensus that the risk-based element should represent most of the levy moneys raised. In that sense we are discussing some important detail—indeed, more than detail—about the nature of the levy, its timing and how specific we should be at this stage about the factors that relate to the risk. We shall cover that matter when debating different amendments. 
 The amendment would delay the introduction of the PPF until the risk-based protection levy can be implemented. Again, I would gently challenge the position of the hon. Member for Eastbourne on that. In debates on the pre-PPF situation, the ASW workers 
 and others, he urges speed, but sometimes he urges delay. At some stage he should clarify whether he wants the PPF up and running as soon as possible or not.

Nigel Waterson: If the Minister had been paying his usual close attention, he would have noticed that clarification during my opening remarks. It is perfectly possible to deal with the interim situation as I have described while setting up the PPF and the long-term levy in a more measured way.

Malcolm Wicks: It is helpful to have that clarification, because the hon. Gentleman mentioned the news reports about the financial situation of Mayflower, the bus manufacturer, and the possible threat to workers' pensions. It is not for me to comment on press speculation, but some companies will run into such difficulties in the coming period. While scrutinising the Bill perfectly effectively—as we are doing—it is also important to look forward to the PPF's coming into being in April next year.
 The amendment would delay the introduction of the PPF, but the hon. Gentleman has clarified that. Setting up the pension protection fund as soon as we can means that some of the information we need to calculate the risk-based levy will not be available from the outset. That is a statement of plain fact and common sense. We remain committed to enabling the board to introduce the risk-related element to the pension protection levy as soon as possible. 
 We have clearly stated that the levy must take into account risk factors. That is clear from subsections (2)(a) and (3) of clause 137 on the pension protection levy, which will ensure that schemes that pose the greatest risk pay the lion's share of the levy. It will be for the PPF board, however, following consultation with stakeholders, to decide how those risk factors will be taken into account when it sets future levy rates and structures.

Steve Webb: This is obviously a central point. Could the risk based-levy be brought in at the start, and if not, what information is lacking? How long would it take to collect it? The Minister has highlighted the fact that the next clause allows the Government to introduce a risk-based levy based on only one risk—underfunding. On that specific point, will the Minister clarify why that information is not available at the start? Why is information on the underfunding level of pension schemes not available at the outset?

Malcolm Wicks: There are a number of reasons, and we may be able to return to that point under a later amendment, when we discuss the criteria relating to the calculation of risk that we establish in the Bill. The process will require detailed assessment of each and every pension scheme with defined benefits. I do not think that all that information is available at the present time. The pensions regulator and the PPF will have to work closely on the issue. Although the hon. Gentleman's argument is that it should be for this House to determine exactly how a risk-based levy is calculated, we do not think that that is realistic. We are setting up the new board to calculate that for us, albeit guided by the Bill. We will return to that issue.
 The amendment would have several implications. It would result in a delay in the commencement of the PPF and would, thus, delay the vital and meaningful protection that we wish to bring in as soon as possible. It would create a risk-based levy structure based on incomplete information; we discussed that. It would place an additional financial burden on employers, who would need to conduct an out-of-cycle PPF-style valuation. Delaying the introduction of the fund is not an option. We need protection for scheme members to be in place as soon as possible. 
 Equally, it would not be wise to publish a risk-based levy framework based on incomplete data. Instead the board can gradually add in the risk-based factors as the information becomes available and operate a dual-levy system in the meantime. 
 Following that clarification, I hope that the hon. Gentleman will withdraw his amendment.

Nigel Waterson: I will, of course, seek leave to withdraw the amendment. I think that, as the Minister suggested, some of the broader and more detailed issues will come up naturally in debating other amendments. As I clearly failed to do so when introducing the amendment, I want to make it abundantly clear that my view is that it is perfectly possible to deal with the interim situation of 60,000 workers plus any Mayflowers that come along between now and when the PPF is up and running properly, rather than rush to have the PPF open its doors on an inadequately funded basis, with a flat-rate levy. That would wreak unfairness across all the schemes—good and bad, well run and badly run, well funded and underfunded—that will be involved. I can imagine few things more likely to persuade employers to shut schemes to new entrants, let alone put them off starting new ones, than that scenario. We will return to those arguments.
 On that basis, I beg to ask leave to withdraw the amendment. 
 Amendment, by leave, withdrawn.

Steve Webb: I beg to move amendment No. 519, in
clause 136, page 83, line 40, leave out from 'or' to end of line 41.

James Cran: With this it will be convenient to discuss amendment No. 358, in
clause 136, page 83, line 40, leave out '12 months' and insert '6 months'.

Steve Webb: The amendment seeks to take out of clause 136 the passage that allows the initial period in which the initial levy will apply to roll on. In our amendment, we suggest that the 12 months that it is allowed to roll on for should be removed altogether. The amendment with which it is grouped suggests that that period should be no more than six months. Obviously the thinking behind the two is the same, which is why you have so wisely grouped them together, Mr. Cran.
 If we are unhappy about having an initial period and an initial levy at all, which we are and which I will come to more substantively, we are even more unhappy about the get-out clause that we are trying to delete. It says, ''If we can't get our act together, 
 we'll have another 12 months''. That may be an imprecise paraphrase of 
''if the regulations so provide,''
 but that is what I take it to mean. There will be an initial levy and initial period. One of its characteristics is that the level of the levy will not be determined by risk. We know that the levy will be set at such a level that it will raise about half of the total that will be raised when the scheme is up and running and there is a risk-based element. 
 Ministers and officials have advised us that the Government's goal is that the risk-based levy will end up amounting to 75 or 80 per cent. of the premium and that the flat-rate levy will end up at only 10 to 20 per cent. The clause says that for the first year the risk-based levy will be 50 per cent. The bit that we are trying to take out allows that to go on for another year. What that means is that, to use insurance terms, the good guys get hit and the boy racers get away with it. In other words, the well run, properly funded scheme with no deficits and a solvent employer has to pay a hefty premium and if we do not get our amendment through it has to pay it for another year. However, the badly funded scheme with the dodgy employer who may go out of business at any moment is paying less than it should. It is bad enough that it happens at all, but it is worse that it should be allowed to continue for a further 12 months. 
 I will not go on at length about our unhappiness with the initial levy as a concept, because, as you will have gathered, Mr. Cran, we are seeking a clause stand part debate on its substance. I will restrict my remarks to the specific proposal. We do not like it at all but, if we have to have it, we certainly do not want the possibility of its continuing for a further 12 months. 
 I hope that the Minister will tell us in what circumstances he envisages the initial period continuing for another 12 months. Will it be because the information is not available and it will take longer to obtain it? If the PPF is inefficient, will the people who pay the levy have to just sit and wait and the good guys subsidise the bad guys? It seems unacceptable that there is a get-out clause at all, so it should be removed.

Nigel Waterson: I think that I am responding to the hon. Gentleman and speaking to amendment No. 358. I endorse almost everything that the hon. Gentleman said. The Opposition share a deep unease about the half-organised way in which the levy will start. The National Association of Pension Funds is also quite exercised about it. It believes that
''it is unacceptable for the period of the initial levy to last for up to two years.''
 It therefore suggests reducing the period from 12 to six months after that date—a proposal that I am happy to adopt. Like almost every amendment, this is only a probing amendment to find out the Government's realistic view of how long the process will take. 
 The Secretary of State, in answering a series of questions posed by my hon. Friend the Member for Havant (Mr. Willetts) before Second Reading, said in a letter: 
''As I explained, it will be necessary to collect the appropriate information in order to be able to charge a risk-based levy''.
 He then talks about the first year and the flat-rate levy at half the normal amount, and continues: 
''We shall then work closely with businesses to allow them to adopt the risk-based element as soon as it suits them, given the triennial nature of schemes' valuation cycles.''
 That strikes me as a recipe for quite a long period of drift, with schemes moving at different speeds. I can see that if one has a well run and efficient scheme, one wants to get stuck into the risk-based levy as soon as possible, but the odd scheme may be quite happy to drag its feet and explain, ''We are at the wrong end of our triennial cycle. It is all very difficult and it may take some time.'' We shall return to the matter, but does the Minister have an end date by which all schemes will have signed up to their version of the risk-based levy? 
 John Plender, writing in the Financial Times at about the time that the Bill was published, put it rather well, saying: 
''Only a raging optimist would expect the risk-based levy to start in a year's time.''
 [Interruption.] The Minister agrees with that from a sedentary position, so we cannot accuse him of being a raging optimist. Mr. Plender points out that 
''the task will be complicated because only a small proportion of companies that sponsor final salary schemes are credit rated.''
 It would be interesting if the Minister were to tell us or write to us about the proportion he thinks that is. John Plender continues: 
''there will be a strong temptation, where pension funds are in deficit, for trustees to punt their way out of trouble through excessive exposure to equities in the knowledge that a deus ex machina lurks in the wings.''
 I am sorry to describe the Minister or the PPF in those terms—all the more so, since schemes are to be granted flexibility over the speed at which they move to risk-based payments. That is very worrying indeed. 
 If I were Marks and Spencer, or a company with a sensible approach to risk, which is in good order, I would get my ducks in a row sooner rather than later. How on earth is one to ensure that all other companies do so? It is a pretty mammoth undertaking, and we have not had any real guidance from the Minister, the explanatory notes or anywhere else about just how long Ministers think the process will take. Some very large schemes have real concerns about how the process will affect them. I shall perhaps return to that later. 
 We need to push the Minister hard on the fact that there should be a final date by which all schemes will be signed up to a risk-based levy.

Malcolm Wicks: I shall not say too much about the boy racer analogy. As a green Member of Parliament, the hon. Member for Northavon (Mr. Webb) recycles his quips. That analogy first appeared in a press notice attacking the Pensions Bill, which he was prescient enough to issue on the day before we published the Bill. The hon. Gentleman had already made up his mind about what the Bill contained, thus relieving him of the task of reading it. I suggest that he reads the Bill
 during the Easter recess; I will not say anything more about that. However, given the imminent leadership bid of the Liberal Democrats, we know who the boy racer will be.
 Clause 136 sets out the provisions relating to the initial period. Amendments Nos. 358 and 519 would restrict the length of time the initial period will apply. That would mean that no contingency was available to manage the establishment of the PPF, which might impact on the setting of future pension protection levies. We are committed to introducing the risk-based element of the pension protection levies as quickly as possible. 
 However, as we are unable to put in place a full risk-based levy structure from the outset, the initial levy is required to get the pension protection fund off the ground. To reflect the fact that the board will not have all the data that it needs to introduce the risk-based element, the initial levy will collect only a reduced amount during that period. I am clear, however, that we expect the board to introduce an element of risk from the second year. The initial levy is likely to apply for the first 12 months. Members of the Committee will recognise the sense of building in an element of flexibility as a contingency. 
 The existence of a provision that can increase the period of the initial levy to more than 12 months will mean that we have a built-in flexible contingency should the introduction of the risk element have to be delayed. Restricting that flexibility may mean that the board is faced with a stark decision either to place additional burdens on businesses by collecting the initial information to introduce a full risk-based approach immediately—we do not think that it can be done immediately—or to introduce a scheme factors pension protection levy only in the year following the initial period to collect the full amount required. 
 In addition, the pension protection levies immediately following the initial levy operate in respect of financial years. Providing for the initial levy to end midway through a financial year, as implied under amendment No. 358, would have implications on the setting of future pension protection levies. That is because, before the start of each financial year, the PPF board must estimate the amount that it will raise from the pension protection levy or levies. The Secretary of State must also determine the levy ceiling prior to the start of the financial year. 
 I must reiterate our commitment to getting the PPF up and running and having a pension protection levy that is based mainly on risk as soon as we possibly can. As we may discuss when we come to other amendments and as members of the Committee may know, although the risk element starts at the beginning of the second year of the PPF, it develops over several years because of the triennial cycle of scheme valuations. If some schemes consider that they want to bring forward their three-yearly valuation because it might benefit them in terms of a risk-based element amount, they can do so. However, we do not want to make that an additional burden on schemes. 
 As for an end date, we are talking about a period in which a full risk-based element for every scheme 
 probably would not come in for three or four years. The hon. Member for Eastbourne grimaces from a sedentary position—if it is possible to do that. I have discovered that it is possible. I repeat that, if a scheme chose to bring forward the three-yearly valuation, presumably to benefit from a lower risk base, it could do so. However, I think that we would be thwarted—also by the hon. Gentleman—if we forced that early valuation on all schemes. It is for that reason that we think that we are proceeding in a measured, proportionate way. I ask the hon. Gentleman to withdraw his amendment.

Steve Webb: That was quite a revealing answer, because the Minister is saying that the provision will not come in until 2005, so the Government will have a year—and if they cannot get it right, they can have another year, which takes us to April 2007. Then, because we are on a three-yearly cycle of valuations, if someone had a valuation just the wrong side of April 2007, the next one would not be until 2010. The Minister seems to be saying that this could end up not looking like a proper insurance scheme until 2010. That is a long time to wait.
 The Minister seemed to be saying, ''We'd quite like it to be done within a year, but we might not manage it. We want to keep this option.'' I can see why he has rejected the suggestion that there should be a valuation every six months. To change things halfway through a financial year would raise other issues. However, it was not such a bad idea to have a deadline and an incentive for the new organisations to pull their fingers out and get things moving. 
 The hon. Member for Eastbourne made the interesting suggestion, originally advanced by the Association of Consulting Actuaries, that there could be an interim, or first stage, risk-based levy based on some fairly simple information that was already available—perhaps something like the MFR criteria—so that even if every dot and comma of what the Government wanted for their all-singing, all-dancing risk-based premium was not available after 12 months, something could be put in place after that period to make the insurance scheme look like an insurance scheme. The Government does not need this get-out. We do not think that there should be an initial period at all, let alone one that could be extended for an extra 12 months, so rather than quibble around the edge by persisting, I beg to ask leave to withdraw the amendment. 
 Amendment, by leave, withdrawn.

Nigel Waterson: I beg to move amendment No. 157, in
clause 136, page 84, leave out line 1.

James Cran: With this it will be convenient to discuss the following:
 Amendment No. 158, in 
clause 140, page 86, line 25, leave out subsection (2).
 Amendment No. 159, in 
clause 142, page 88, line 9, leave out subsection (2).

Nigel Waterson: These amendments are a symptom of my paranoia about the Treasury, mention of which dips in and out of the Bill from time to time, particularly with things that really matter. Suddenly, regulations made under subsection (3), which I am attempting to remove through the amendment, have to be made
''with the approval of the Treasury.''
 I do not know why that is so. I have made comments before about the Department for Work and Pensions being a wholly owned subsidiary of the Treasury, and they are still valid. Why should the Treasury be involved in regulations governing the detailed make-up of the initial levy, let alone any of the other levies? 
 My comments apply to the Treasury's involvement in the other levies that are being established, too. Why should it get involved in the initial levy, which is, after all, meant to be an interim measure? Perhaps it is not so interim, as we have just heard; it seems that it may last more like four years, which is the lifetime of a Parliament these days. The Treasury is not guaranteeing the scheme and it has no direct interest in whether the levy is set at the right level. 
 In any event, it is almost impossible to envisage the initial levy being set at the right level—but leaving that aside, what is the Treasury's involvement in this matter, unless the Government are, without admitting to it, sidling up to the American solution? Although there is no formality about this, everyone recognises that the Government would stand behind the PPF if it got into difficulties, especially in its early days. As they say in Private Eye, I think we should be told.

Malcolm Wicks: The practicalities and timing around getting the PPF up and running, and protecting scheme members as soon as possible, mean that the initial levy period and a transitional period are needed to set in place the PPF. The amendments would mean that the initial levy—the pension protection levies during the transitional period—and the levy ceiling would all be set without any reference to the Treasury.
 Because clauses 136, 140 and 142 all confer powers to raise a levy, it is vital that the relevant regulations are made with the approval of the Treasury. It is important that appropriate mechanisms are put in place to agree the parameters for setting the initial levy, the pension protection levies during the transitional period and the levy ceiling. In addition, it is important that those parameters are agreed by the Treasury, because of the financial implications that they will have on both pension schemes and businesses. 
 The amendments would mean that the initial levy, the pension protection levies during the transitional period and the levy ceiling could all be fixed without reference to the Treasury. That is not sensible. I am sure that hon. Members, and businesses that might be subject to the initial and pension protection levies, would agree that the requirement for the Treasury to be involved in the setting of parameters for any levy-raising power is prudent and appropriate, and would assist in managing the financial implications that any changes to the levy structure would undoubtedly have. I ask the hon. Gentleman to withdraw his amendment.

Nigel Waterson: I will, of course, do so, but not with any great pleasure. The Minister is arguing by
 assertion; he is not explaining to us why the Treasury should be involved. If he is worried about the impact on business, it would make more sense for the Secretary of State for Trade and Industry to be directly involved in approving regulations.
 We are setting up a body to establish the right figure for the levy. Why should that be second-guessed by the Treasury? The figures are either right or wrong. If the Minister is saying that the Treasury will have a raft of different criteria—macro-economic ones, perhaps—for working out the levy, that is worrying. He is welcome to intervene if I am overselling what he is saying, but it is worrying because we are going to a lot of trouble to establish different levies through the machinery being set up in the Bill, but the Treasury could take a totally different view, based on completely different criteria, presumably outwith the criterion of whether the levy will provide sufficient income for the PPF to carry out its functions. 
 The Minister has not explained why the Treasury should be involved. I can see why the Department of Trade and Industry might be relevant, but his apparent unwillingness to leap to his feet—

Malcolm Wicks: The hon. Gentleman is making extraordinarily heavy weather of a simple proposition. We are giving the board powers to raise a levy on pension schemes, and so, in a sense, on business. The Treasury is responsible for the management of economic affairs in Britain and it is sensible that it should be consulted about such levy powers. That is uncontroversial, and I know that if this were not in the Bill the hon. Gentleman would have proposed that we consult the Treasury.

Nigel Waterson: The pre-recess camaraderie has evaporated already, and it is barely 10 o'clock; I am sorry to disappoint the Minister. Among my constant themes in Committee has been a distrust of the Treasury and great puzzlement as to why the Government want to keep everything at arm's length when it suits them, yet when it does not suit them, they still want to have their hands on the levers.
 The Treasury may have its own reasons for saying that a lower or a higher levy must be charged. It is much more likely to say that the levy must be lower, for economic and/or political reasons. There is no point in consulting it if it will just rubber-stamp whatever is proposed, so presumably it has a say. Particularly with regard to the initial levy in the difficult early years—four years, by the sound of it—before the PPF is established, the Treasury will then be able to say, ''No, you can't charge that much; you'll have to reduce it.'' Where does that leave the PPF? Where does that leave the chairman and chief executive of that new organisation? The advert apparently describes the new chief executive as somebody with ''drive and vision''—so far, so good, but then that has to be ''coupled with political sensitivity''. I beg to ask leave to withdraw the amendment. 
 Amendment, by leave, withdrawn. 
 Question proposed, That the clause stand part of the Bill.

Steve Webb: Having gone through a clause in detail, I would not normally seek a separate stand part debate, but I have tried to restrict my comments so far to the detailed amendments, because now I want to raise the general principle of having an initial period at all. The key point is that we are clearly setting up an insurance scheme. The Secretary of State said that a person could insure their holiday and their car, and asked why they should not be able to insure their pension.
 The idea is that because an employer or a pension scheme is paying a levy into the pension protection fund, workers will know that if the company goes to the wall and the fund does not have enough money, their pension will to a greater or lesser extent be protected. So far, so good. The question then is on what basis such insurance premiums should be calculated. 
 I sensed some months ago that car insurance would be a helpful analogy for our deliberations. Car insurance providers make a distinction, as far as they are able, between good drivers and bad drivers. When a person has a crash or gets done for speeding, their premium goes up, because they are deemed more likely to make a claim on the fund. Eventually, the Government will get round to charging premiums on a similar basis for the pension protection scheme. 
 However, if we keep clause 136 in the Bill, there may be a period of up to two years during which they do not do that. The Government say, ''We need a bit of time to get the facts and figures together. Just give us a few years and we'll sort it out.'' However, this is not a free lunch; the two-year period will not be without costs—and the people bearing those costs will be the good guys. 
 We have talked a lot in the Committee about one of the problems of insurance markets—moral hazard, the effects of which the Government are worried about. However, from my undergraduate economics I remember that there is a second problem with insurance markets—adverse selection, and that will be the problem with the initial period. Good drivers who get charged unfairly for their premiums still have to have car insurance, but good companies that run good final salary schemes do not still have to run final salary schemes. If the premiums are perceived to be unfair and too high for the good guys who run properly funded schemes with good solvent employers, they may well say, ''This is unfair, and too much of a burden for us. We'll switch to a money purchase scheme, for which we'll pay no levy at all.'' 
 The good guys, who present no risk to the fund, would pull out and the fund would be left with the bad guys—the underfunded schemes and the nearly insolvent employers. In turn, that would undermine the effectiveness of the fund and put up the amount of levy that needs to be raised. We would be taking out a potential source of revenue—from schemes that will never make a claim—and there would be a heavier and heavier concentration of schemes with a high chance of making a claim. We would end up undermining the entire basis of the system. 
 If the initial period were really short, schemes would live with that, but it could last for two years. Pension funds may already be on the cusp of deciding 
 whether to carry on with final salary schemes. We have already seen lots of good final salary schemes close to new members, and that probably means that for every one that has gone over the cliff, there is one that stopped just short. 
 In his previous remarks, the Minister was at pains to say that he did not want to close good final salary schemes. He did not want to overegg the pudding or put all the bells and whistles on the benefits, because that would put the levy up and put extra pressure on the schemes. However, having an initial period would guarantee that the good guys would pay more than their fair share. Surely he would accept that there is a risk? He may say that the initial period will probably not be two years, and that he hopes that it will be one year—but the Government are clearly worried that it might be more than one year, otherwise that provision would not be in the clause. 
 The Minister might also say that that would not be enough to make a difference. However, we have to remember the point that I made earlier: during that period, everyone will pay 50 per cent. on a per head basis, whereas when the risk-based levy is up and running, the good guys will probably not have to pay it at all, because they are not a risk. They would only pay the per head amount, which would be less. During the initial period they might pay two and a half times what would be the right amount for them. The per head amount might be, say, 20 per cent., but the payment would start off at 50 per cent. during the initial period, and the good guys might be paying double what they would if there had been a fair assessment of their risk. 
 We all accept that the scheme would be a burden on final salary schemes, but it is a burden that we are willing for them to take. We have tried to make savings elsewhere, but the burden will be particularly heavy in the first couple of years. 
 The Government must accept that for years they have watched final salary schemes close and membership of such schemes for new members decreasing year after year. There has been precious little that they could do about it, because they cannot force schemes to offer a particular pattern of benefits. However, the one thing that they can do is to get off the backs of good schemes. It is a classic case of Government putting an additional burden on the good guys, who are, surely, the very people on whom we want to put as light a burden as possible. 
 That is why we think that clause 136 should not exist. Yes, it puts a burden on the PPF to get things moving, but we have accepted that the risk-based premium could be calculated in a rough and ready way to get the thing going and the situation could be refined subsequently. That deals with the problem of information. I accept that one is not going to get chapter and verse on 150,000 schemes overnight, although already there is another year between now and the start of the PPF. Therefore, the Government want to potentially allow three years in which to get that information. Why? The basic information—a crude indicator of risk for those schemes—could be 
 obtained in the next 12 months, quite credibly. [Interruption.] I am sure that the Minister will make that point. It could be obtained to get the thing going and not risk killing the goose that lays the golden egg. The worry about the whole process is that at the end of it we might have the best insurance scheme in the world but nothing left to insure. Let us get off the backs of the good schemes and let us not have an initial period.

Nigel Waterson: I endorse a great deal of what the hon. Gentleman has just said, but I want to add a few comments.
 It suddenly started to dawn on me that the Government's problem is that they are looking at all this from the wrong end of the telescope. They are quite understandably keen to get the PPF set up, to get this legislation on the statute book and, as all Governments want, to say, ''That is a promise redeemed and it is one that we have made to future pensioners.'' They will clearly get their legislation. Whenever their lordships have spat the Bill out and all of the stages have been completed within this challenging time scale, a PPF will be set up. It will have a chief executive—on whatever salary it might be—a part-time chairman, and all of its people, some of whom will have transferred across from the Occupational Pensions Regulatory Authority. It is right that they should be getting on with that. 
 I can understand that Ministers must be more than a tad frustrated by the fact that this idea of theirs, this gleaming new concept, is being comprehensively overshadowed, as it was on Second Reading, by concerns about the lack of action over the people who have already lost pension rights and those who are continuing to lose them, as in the case, possibly, of the Mayflower company. Where Ministers have got it horribly wrong is that they should be giving priority to that. That is the problem that needs to be addressed now; those are the people who are worried and who come and see me or their excellent local Member of Parliament, such as the hon. Member for Cardiff, West, or, as we have heard from the Minister, they come and see him and his right hon. Friend the Secretary of State. 
 Why not decide to set up the structure, more as less as the Government intend, adopt our idea of a parallel interim protection scheme—one of our slick amendments that is not in order because of the money resolution—so that all the structures that are necessary to run these funds can be getting organised, and sort out the funding of the interim compensation in some of the ways that the Government are doing, albeit at a snail's pace, and by adopting the idea of unclaimed assets? They might wish to go down another route; the hon. Member for Cardiff, West said that he did not care where the money came from. That is a matter for them and they should start addressing that problem and the new ones as they arise. 
 The Government should recognise that, in reality, starting off with an initial levy is a bad idea. The more I think about it, the more I think that the Committee should divide on the issue of whether we should have an initial levy at all. It will get the PPF off to a bad start for two reasons, both of which were touched on 
 by the hon. Member for Northavon. It will create resentment and disincentives to the good schemes and the companies that are already beginning to think about whether they want a defined benefit scheme. For a significant period, perhaps up to four years, they will find themselves effectively subsidising the bad schemes. In addition—I make no apology for voicing this fear again—the funding may simply not be significant enough to cover the liabilities in the opening years of the PPF. There is some consensus that we need a PPF, although there seems to be an inability to decide how to describe the animal and whether it is insurance or pension, but I leave that on one side for a moment. Everyone wants it to work. If we inherit the scheme, we do not want to find that it is in a mess, heading for a big deficit and losing confidence among reputable companies, so it is not in our interest to see a badly constructed, underfunded, failing organisation in its early years. The Minister should be aware of that. We want it to work and our arguments and amendments were designed for that purpose.

Steve Webb: The hon. Gentleman made a good point. Things could go pear-shaped in the first year because, as some of the doom-mongers have said, some of the schemes are just waiting for year one. Given that the initial levy could last for two years, the second year's levy, which would be a flat rate and not risk-based, could be quite high as a result of the need to make up the shortfall on the fund. That would be even more unfair to the good guys who have no risk-based element in the initial period.

Nigel Waterson: The hon. Gentleman made a pertinent point.
 Turning to the interim situation, I have an uneasy feeling, particularly as a general election begins to loom, that our position will be misrepresented. We want these matters tackled. The Government have become obsessed—I understand that the machinery of Government takes over if one is not careful—with this legislation. The real problem is out there already and is not being tackled by the Bill because it will not be retrospective. Various interim measures could be adopted and unclaimed assets is our preferred solution. The preferred solution of the hon. Member for Cardiff, West may be taxpayers' money, unspent money in the Department's budget and so on. There could be a realistic appraisal of the rightful claims of those who have already lost out with some boundaries on those claims, and a look at the idea of postponing annuity purchases as one way of keeping the show on the road until a more lasting solution is found. We have also punted the suggestion of the Association of Consulting Actuaries, which the Minister said that he would deal with when he winds up. Another suggestion is that the MFR basis, which is the only game in town at the moment, with an element of the risk-based approach in the interim period would be a practical solution. 
 We are not in the business of being negative about the problem; we are simply looking at ways of helping the Government out of the difficulty. The Bill contains 
 some good provisions, but almost all the press comment seems to focus on what is not in the Bill—there is no help for people who already have problems or are beginning to have problems. We should change the way in which we look at the matter. Yes, let us get the legislation sorted and improved, but let us also start to look at the immediate problem and interim measures. I have made some helpful suggestions as to how that can be done.

Malcolm Wicks: I suppose that this has been a useful debate, but we are making a great meal of the matter. I repeat that we want the risk-based element to come in as soon as practicable from the start of the second year. To get the thing up and running, we need to start raising funds. The initial levy will be at 50 per cent. of the later levy. We are probably talking about £10 per member, so when the great arguments are made let us remember that we are talking about 10 quid in the initial period.
 Could we introduce a risk-based element sooner? We do not think that we could and we do not think that the board could; if we had thought so, we would have proposed that. The answer does not lie in the minimum funding requirement, which has already been criticised, and is being abolished; if it were the answer, we would not be abolishing it. The MFR will make way for scheme-specific funding, which we discussed a few weeks ago. Trying to base the risk-based pension protection levy on an out-of-date MFR valuation, or establishing a system to update the MFRs to a relevant current date when the figures are simply not available, would be absurd. We cannot just turn to OPRA and ask for the MFRs because the figures are not there. On balance, allowing the PPF board time to introduce a more appropriate method of determining scheme funding will be beneficial and sensible in the long term. 
 Apart from talking about boy racers, the hon. Member for Northavon talked about the good guys—I imagine that that is a gender-neutral term these days—and said that they will lose out. If a well run company with a well run pension scheme thinks it will lose out because of a delay to the risk-based element, it can bring forward its three-yearly valuation cycle.

Steve Webb: Not in the initial period.

Malcolm Wicks: Not in the initial period, no. The company will have to take on the enormous burden of claiming £10 per member—for the Hansard record that should be followed by the word ''irony'' in brackets. Americans may not understand irony, and nor does the text of Hansard, so I should be careful.

Nigel Waterson: You are making heavy weather of the irony.

Malcolm Wicks: At least I have some.
 The amount of £10 per member will not bring schemes crashing to the ground. It is a sensible way of raising some initial money. If, after the first year, people want to bring forward the triennial cycle, they can do so if they are confident, as many will be, that they will not have to pay any risk-based element. That disposes of the idea that somehow the MFR is the solution. 
 I would not want it to be recorded that somehow the risk-based element is not going to be up and running until 2010, as the hon. Member for Northavon was saying. That is not right. The requirement for a valuation on PPF level of benefits will be in place by 2005. The three-yearly valuation cycle takes us to 2008, so the full risk-based levy could be introduced for all schemes at the end of the process by 2009—[Interruption.] Well, I will say it a third time: if schemes want to bring forward the three-yearly valuation, they can do so. That is why there is a transitional period enabling the board to roll out the risk-based approach. We think that that is sensible. The board could require it to be rolled out more quickly if it deems it appropriate. However, we should not set up an arm's length body to second-guess in Committee every detail of what the PPF's approach may or may not be a year or so into its work. That is not sensible.

Steve Webb: There is a precedent—I think in the case of child support—for this Department taking powers to spend public money prior to an Act coming into force in order to get things moving so that the body is up and running on the day it begins. Have the Government considered doing the same for the PPF? If the Government use powers to start spending public money on the PPF to get it going, say, tomorrow, they would have another year, and then perhaps we would not need an initial period.

Malcolm Wicks: As the hon. Gentleman reminds us, we have powers to spend limited amounts of money after Second Reading, which is why we are advertising the two key posts. We are preparing hard for the establishment of the PPF in all sorts of ways. Nevertheless, when the Bill receives Royal Assent there will be a limited period before we set the whole thing up. It is our judgment that it would not be possible or practicable to do all the work to get the risk-based element up and running in April 2005.
 We understand that there might be an element of injustice in asking everyone to pay the same flat rate, so we are setting that at a modest level. It is only 50 per cent. of what the average levy will be in the second and subsequent years—approximately £10 per member. We think that that is fair and proportionate. 
 Question put, That the clause stand part of the Bill:—
The Committee divided: Ayes 15, Noes 6.

Question accordingly agreed to. 
 Clause 136 ordered to stand part of the Bill.

Clause 137 - Pension protection levies

Steve Webb: I beg to move amendment No. 520, in
clause 137, page 84, line 3, leave out 'one or'.

James Cran: With this it will be convenient to discuss the following:
 Amendment No. 521, in 
clause 137, page 84, line 35, leave out paragraph (a).
 Amendment No. 522, in 
clause 137, page 84, line 36, leave out 'levy or'.
 Amendment No. 523, in 
clause 137, page 84, line 39, leave out 'levy or'.
 Amendment No. 524, in 
clause 137, page 84, line 40, leave out 'levy or'.
 Amendment No. 525, in 
clause 137, page 85, line 8, leave out 'a'.
 Amendment No. 526, in 
clause 137, page 85, line 8, leave out 'levy or'.

Steve Webb: Our discussion of this group of amendments can be brief. We will have a more substantive debate on the next group. This group addresses the components that will be in the levy after the initial period has passed. Not only should there be a risk-based element, which will happen in any case, but there should be a scheme-specific element immediately after the initial period. Schemes want certainty. They want to know where they stand with regard to the pension protection fund and the levy. They want to know the basis on which that will be calculated and how much they will have to pay. We have learned that under these proposals, schemes will not have certainty for many years. How long the initial period will last is not known; it could be one year, or it could be two.
 As clause 137 stands, after up to two years the levy can be introduced, it can be risk-based—it can include certain sorts of risk but not others, which is the subject of the next group of amendments—and it can include scheme-specific characteristics, or they can be added at some point by the board. There will be a period when there could be one sort of levy and then another sort of levy; one bit of it would have to be in but another bit would not, and another bit might be amended in different ways. It could be constantly changing; the board has the power to muck about with the scheme every year. Schemes will get to the stage where they just want to know where they stand. 
 There could be a good case for having scheme-specific elements in the levy. Factors such as the earnings distribution of the work force covered, the mix of assets and liabilities in the scheme, and many of the things listed in subsection (4) may be relevant to the chances of the scheme making a claim on the fund, and to the size of the claim that it might make. It would be sensible to include such factors. Pension schemes want certainty about the levy. We are talking about at least two, if not three, years down the track, so when all those factors come in, it will be sensible to 
 deal with them together, so that schemes know where they stand. That is the point of this group of amendments.

Malcolm Wicks: These amendments would require the PPF board to set both a scheme factors pension protection levy and a risk-based pension protection levy for each financial year following the initial period. The amendments would result in the board being unnecessarily constrained and unable to introduce the most appropriate levy rates and structures.
 We consider both scheme factors and risk factors important and necessary for the calculation of a scheme's contribution to the PPF; I do not think that much divides us on that. The provisions in the Bill allow the board to set one or both of the pension protection levies, but emphasis is placed firmly on the use of risk factors. That is because the board must collect what it estimates to be at least 50 per cent. of the levies from the risk-based pension protection levy. The requirement for the board is set out in clause 139(3). Indeed, the board could decide to set a pension protection levy based purely on risk. However, if the amendment were made, the board could not do that. Amending the provision so that the board would ultimately be constrained in that way is both undesirable and unnecessary. 
 To require the board to set both pension protection levies would also cut across other provisions in the Bill. For example, the board can decide to set only a scheme factors pension protection levy if the amount that it expects to raise in a year is less than 10 per cent. of the levy ceiling for that year. That would apply only in very favourable circumstances, of course. For example, our regulatory impact assessment estimates that the annual amount that might be raised by the levies in any one year is £300 million. That would mean that the levy ceiling would be set at £600 million. This is hypothetical, but if the board needed to raise less than 10 per cent. of that amount in any one year—£60 million—it would have the freedom to do that on a scheme factors basis only. The framework that we are suggesting will ensure that the board does not have to put in place a complicated risk structure when it aims to collect a relatively small amount. 
 We feel that we have found a balance that allows the board the necessary and appropriate levels of flexibility while recognising the importance of risk-based factors in setting pension protection levies. It is important that we provide the board with the ability to determine the most effective levy rates and structures for both the PPF and businesses in future. I therefore urge the hon. Gentleman to withdraw his amendment.

Steve Webb: I am slightly puzzled by what the Minister says. There is a good case for a scheme-specific levy. To give just one example, part of the levy is an amount per scheme member, and that amount does not vary according to whether someone is a full-timer or a part-timer. Particular sorts of pension schemes—those of retailers, say—might have lots of part-time members. Therefore the levy, as a percentage of the payroll, would be much more significant, even though the members were not getting any more
 protection out of the scheme, because it would be a smaller pension scheme. If we bring in a scheme-specific element to the levy, we deal with that sort of problem. That is why I think that a scheme-specific element would be good.
 However, the thrust of my remarks has been that we want the risk-based element to be as big as possible. If the Minister is right to say that the amendments would make it more difficult for the risk-based element to be as high as we would like—and I am prepared to accept that—I suppose that is an unwarranted by-product of the amendment. On that basis, I beg to ask leave to withdraw the amendment. 
 Amendment, by leave, withdrawn.

Nigel Waterson: I beg to move amendment No. 215, in
clause 137, page 84, line 14, after 'liabilities', insert— 
 '(ia) the likelihood of an insolvency event occurring in relation to the employer in relation to a scheme,'
.

James Cran: With this it will be convenient to discuss amendment No. 216, in
clause 137, page 84, line 21, leave out paragraph (a).

Nigel Waterson: To some extent, these amendments mirror the previous group. They are intended to tease out the final shape of the risk-based levy. It makes sense to spell out as clearly as possible in the Bill how that levy should be made up, and the factors that should be part of it. Clearly, the details are for the future. However, there is a certain unease in the industry, and in industry generally, about the apparent lack of detail.
 I have to confess that amendments Nos. 215 and 216 were inspired by the CBI. It says that it is concerned about continuing uncertainty as regards the fundamental structure of the levy and about whether insolvency risk will be included as a risk variable. Although it believes that insolvency risk should be incorporated, it recognises that there are practical issues around measuring insolvency risk and assessing asset allocation. It feels that the Government should be clear about those factors being part of the calculation of the levy. The CBI has strong concerns that those key decisions should not be left to a newly appointed pension protection fund board. The amendments would therefore ensure that the Government would take the decision about whether the risk-based elements of the levy will take account of insolvency risk and investment strategy, as well as underfunding. 
 In fairness, the fact sheets prepared by the Government on this subject are fairly reassuring. They make the point about drawing on the United States experience. I will return to that. The fact sheets refer to 
''ensuring that risk-based factors will be the major component of our levy''.
 That mirrors words that the Minister used. If by that the Government mean 50 per cent. or more, I suppose risk-based elements would be just about the major factor, but we will deal with that in relation to a different amendment. The fact sheets go on to say: 
''The Bill specifies a number of factors that can be considered in assessing risk—scheme underfunding, credit-rating and investment strategy—and also leaves flexibility for the PPF board to add more.''
 Having set out in the fact sheets the obvious bases for assessing risk, what does the Minister think are the additional bases that the PPF board might consider? What have Ministers got in mind? 
 The Government's fact sheet refers to the US experience. This is one issue on which it is quite instructive to consider the way in which the Pension Benefit Guaranty Corporation has been set up and developed. I just looked up my notes of a very friendly meeting I had with Mr. Steve Kandarian, the former executive director of the PBGC, when I was in Washington. Incidentally, I notice that he is giving a lecture at Imperial college on the Thursday of the week when we come back after the Easter recess. If the Whips are prepared to co-operate—neither of them is in the Room, which is helpful—we could ensure that our Thursday sitting finished in time for us to go on a bus, paid for by the Department, to listen to Mr. Kandarian. I certainly intend to attend. It will be extremely useful. 
 Mr. Kandarian made a variety of points, some of which I have covered, on different aspects of the Bill, but he was adamant that one of the main problems that the corporation faced—one of the reasons why it had a massive deficit and was under all that pressure—was that its premium, which is the equivalent of the levy, takes no account of creditworthiness or the risk attached to particular pension scheme investments. There is still a basic levy of $19, with an element for underfunding. Unlike the arrangements under the Bill, the US has no formal cap on the premium, but as we have heard, there is political influence in the direction of its not being set too high. 
 It is also instructive to consider the evidence given by Mr. Kandarian to a special committee of the US Senate. I do not know whether the Minister gave evidence to that committee. I have not yet been able to identify it on the internet, but perhaps I will. Mr. Kandarian said: 
''When underfunded pension plans terminate, three groups can lose: participants can see their benefits reduced''—
 clearly— 
''other businesses can see their PBGC premiums go up, and ultimately Congress could call on the taxpayers to support the PBGC.''
 It is important in everything that we are doing to remember those three potential payers in any such situation. He says later: 
''When the PBGC takes over underfunded pension plans, financially healthy companies with better-funded pension plans end up making transfers to financially weak companies with chronically underfunded pension plans. If these transfers from strong to weak plans become too large, then over time strong companies with well-funded plans may elect to leave the system.''
 That is an extremely perceptive comment, which we need to have in mind. It would be the ultimate irony—because irony seems to be the flavour of the morning—if we went to all this trouble to pass the Bill and it encouraged more employers to get out of that kind 
 of pension scheme. Mr. Kandarian mentioned the $11.3 billion loss in the last accounts, which is 
''more than five times larger than any previous one-year loss in the agency's 29-year history.''
 He also said: 
''The title of this hearing asks whether America's pensions will be the next savings and loan crisis.''
 There is a lot of interesting background, with which I will not weary the Committee, about the make-up of the claims in the PBGC. It is interesting that currently in this country the typical failed scheme is that of a smallish engineering company. We have not, thank goodness, seen any massive failures so far, although one occasionally hears of potential failures. However, the PBGC, as a much more mature scheme, is dominated in terms of money by airlines and steel companies. There has been an enormous peak and surge in claims in the past year or two. Mr. Kandarian says: 
''At current premium levels, it would take about 12 years of premiums to cover just the claims from 2002.''
 He continues: 
''The premium—
 the American version of the levy— 
''has two parts: a flat-rate charge of $19 per participant and a variable-rate premium of 0.9 percent. of the dollar amount of a plan's underfunding, measured on a 'current liability' basis. As long as plans are at the 'full-funding limit', which generally means 90 percent. of current liability, they do not have to pay the variable-rate premium. That is why Bethlehem Steel, the largest claim in the history of the PBGC, paid no variable-rate premium for five years prior to termination, despite being drastically underfunded on a termination basis.''
 I commend Mr. Kandarian's evidence, and his lecture in a couple of week's time, to the Committee. His evidence underlines the absolute need, from day one, for all the reasons that we have discussed—although we have had that debate and vote—for a proper, really sophisticated risk-based levy. It also underlines the real dangers that are faced if all the risks are not taken into account and made clear in the Bill. We have to look not just at the rather narrow version in the PBGC. The Americans bitterly regret that now, and there is a consensus that when the elections are over they will have to revisit it in legislation at some point, and they are only looking at the underfunding in a particular scheme. We will have to consider the creditworthiness of a company and the risk profile of the investments that a scheme chooses to make. Then we get into the moral hazard argument, on which I have a lot to say, but under a different group of amendments. These are important risk elements that need to be written and set in concrete; there should be a minimum set of risk elements in approaching the levy. 
 I should be interested to hear from the Minister why we cannot at least specify minimum types of risk in the legislation and what other risks he had in mind when he drafted the fact sheet.

Steve Webb: Mr. Cran, you will have observed that this group of amendments has the names of both principal Opposition parties appended to it. We, too, think that, when the risk-based levy comes in, the risks that it should take account of include not only the
 underfunding of the scheme, but the risk of the employer going out of business and prompting a call on the fund. It is what a fellow Liberal Democrat, Basil Fawlty, would call a statement of the blindingly obvious, that claims on the fund are only made if the company is likely to go out of business. An underfunded scheme may never go anywhere near the pension protection fund, because underfunding does not of itself make a call on the fund. It is only the event of insolvency that prompts a call on the fund. It would be a topsy-turvy world if the ''risk-based premium'' did not include the risk of making a claim on the fund because of insolvency, which is what triggers a claim on the fund.
 That is not an argument for not including an underfunding risk element as well, as that is the other side of the coin. However, it seems odd to give the board the power to introduce a risk-based premium that does not take account of the insolvency risk. 
 The effect of the amendments would be to move the insolvency risk into the part of the clause that details the things that the board must include, rather than those that it may include. Why is it where it is? I think that the Government will say that they might have trouble measuring insolvency risk. Clearly that is a key issue. A premium can only be assessed in terms of risk if there is some way of assessing the risk. If insolvency risk were unmeasurable, sticking it in this part of the Bill would not be much use. 
 However, it is important to make a distinction between the range of occupational pension schemes that we are talking about. While a lot of them may be for small companies where there is no credit rating, the big schemes, which will be putting in most of the money, will be operated by the type of companies who do have credit ratings. In other words, it would be a bogus argument against the amendment to say that because we cannot do an insolvency risk assessment for 150,000 companies we cannot do it at all. There could be an assessment of the insolvency risk of the big players, while the premium on the small players would not include an insolvency risk element if that was not considered measurable. I can see no argument against that. If we can get it right for the big players who are contributing the bulk of the premiums, ignoring the insolvency risk for the small players, for whom it may be difficult to measure anyway, may be something that we have to live with. That would still make things fairer. 
 One might think that fairness is an odd concept here, but the danger of an ''unfair'' levy is that it would drive the good guys out. To give one example, consider a company such as British Telecom. At one point last year it had, on the FRS 17 valuation, a scheme deficit of £6 billion. Nine months later the deficit was down to £3 billion. That is a company that is doing a great deal about its deficit. Nobody thought that BT would go bankrupt or make a claim on the PPF, yet if we do not pass the amendment its premium could relate wholly to the huge gap in the fund. So it could have faced a huge premium even though there was practically no chance that it would make a claim 
 on the fund. That seems to be totally irrational. I am aware that BT has closed its final salary scheme to new members, probably for a variety of reasons. 
 It is bad enough to have a flat-rate levy for two years, but when the levy becomes risk-based, if it does not reflect the true risk of companies making a call on the fund, such companies might well give up the ghost. The Minister said, ''Oh well, we are only talking about a tenner'', but for a big scheme, for which it may be possible to judge the insolvency risk, that is a lot of tenners if there is a negligible insolvency risk. We could be talking about millions of pounds. To expect such companies to pay millions of pounds in premiums when they pose no risk to the fund seems not merely unfair, but to have the potential to kill off the remaining final salary schemes for new entrants to large employers. 
 I wholeheartedly support the amendments. I agree that insolvency risk cannot be assessed for every company, but there is enough information to assess it for the big players, thereby creating fairness and avoiding counter-productive effects on the premium. Insolvency risk should be included.

Malcolm Wicks: The hon. Member for Eastbourne is in burdens-on-business mode today, whereas on Tuesday he was more into saying that the PPF was not generous enough and that it should pay out more benefits—with, presumably, burdens on business. I am not sure that that is a consistent approach. However, to be generous, perhaps it is perfectly reasonable when dealing with probing amendments to be, if not all over the place, of two minds, to put it more delicately. Nevertheless, if we all go to the lecture on a bus, it should be a bendy bus for the hon. Gentleman's convenience.
 Clause 137 sets out provisions for the pension protection levies, including the factors that the board can take account of in calculating them. The amendments would result in the board being required to take into account the likelihood of an insolvency event when calculating the risk-based part of the levies. The Government recognise the importance of a variety of risk factors in determining the likelihood of a scheme requiring PPF assistance, but we consider the funding of the scheme to be the most critical measure. We have therefore made it a requirement for the board to take account of such funding when it sets the levies. 
 The other risk factors that the board may take into account when setting the levies, such as insolvency risk or investment risk, are also important, which is why they are included in the Bill. We fully expect the board to use all the information available to it to make informed decisions about future pension protection levy structures. 
 Officials from my Department have been meeting with representatives from industry to discuss how insolvency risk might be taken into account when setting the levies. They will continue to work with the industry during the next few months to establish the information and processes currently available and to provide the board with various insolvency risk options. That will help to reduce the amount of time 
 the board spends establishing a measure of this nature and help it to hit the ground running. I hope that that answers the point raised by the hon. Member for Northavon. Although I cannot concede that it will be possible to include the risk element from day one—in April next year, I hope—we are doing a great deal of preparatory work. 
 Establishing the likelihood of an insolvency event is not as straightforward as it might seem, as there is no consistent, across-the-board method for doing so. For example, not all employers who sponsor a pension scheme have credit ratings. As such, it would be difficult to justify placing a requirement on the board to take that factor into account. Credit ratings are just one part of the answer to the hon. Gentleman's question about why the information is not available at present. 
 As I said, officials in my Department are working with industry to establish the options that might be available on insolvency risk. The board needs flexibility and independence when conducting its business. It must be able to determine a levy structure that best suits itself and sponsoring employers, within the framework set out in the Bill. The amendment would result in the board's being restricted in the way in which it sets future levy rates and structures. It would also require the board to take account of a risk factor for which a comprehensive measure is not yet available. 
 On other points, it would not be appropriate for me to name companies, but let us always remember that history, although not littered with examples, does offer several cases in this country and in the United States. Bethlehem Steel, which the hon. Gentleman mentioned, is a major example. There was a time when people said of that company, which I believe built much of the US navy in the second world war, that if it ever went out of business, the USA would. I shall not mention any British examples, but we all know of companies that not so long ago were guaranteed to last forever and did not. Sadly, that will be the case for some of the great names in British business during the next 10, 20 or 30 years. Hopefully, it will not be true of too many.

Steve Webb: That is clearly true, but a company does not turn overnight from being rock solid to being a basket case. As its condition becomes more serious and its insolvency risk increases, so should its premium. That is only right and proper. When a company looks rock solid, its premiums should be low, and when it is moving towards being a basket case, the risk of making a claim on the fund goes up, so that should be part of the process. The provision would not be in the Bill if the Minister did not think that that was true. The argument he has just made is not an argument against putting the insolvency risk into the levy, is it?

Malcolm Wicks: Insolvency risk is one factor that the board will take into account.

Steve Webb: Or may not.

Malcolm Wicks: It is on the face of the Bill. We are discussing it with colleagues in industry so that we can present options to the board, and it can then make early decisions on the matter.
 There is only one other point I would like to emphasise. The hon. Member for Eastbourne was helpful in reminding us of the American experience. We are learning lessons from the PBGC. I hope that Mr. Kandarian will have time to do other things occasionally before he takes up a business appointment. He has certainly been very generous with his time to myself, my colleagues in the Department and the hon. Gentleman, and no doubt to others. His lecture will be interesting and we should think about whether we can all attend that lecture, as long as no Opposition Members say, ''Will the hon. Gentleman give way?'' because that would be impolite to a visiting American. 
 We have learned lessons, and one key lesson is that we have to give the board flexibility. We are setting it at arm's length as a non-departmental public body; that is right and proper. There are constraints in the Bill—the Secretary of State has a role—but the board can raise the levy up to a ceiling. It has that flexibility. In the United States, the PBGC has to go cap-in-hand to Congress. Therefore, the levy has not been raised for a good number of years. 
 The second lesson is that the risk-based element has to be a substantial part of the levy—certainly more than 50 per cent. My guess would be that the board could determine that it would be much higher than that. I think that I am right in saying that the risk element for the PBGC in the United States is about 25 per cent. There is quite a measure of difference. Those are lessons we have learned by comparing and contrasting what we feel we need in the United Kingdom with the experience in the United States.

Nigel Waterson: I am still fairly wedded to the amendment. When the Minister was making his ironic comments at the beginning of his speech about burdens on business he got the whole point precisely wrong. It is because the good, well run businesses are so keen that the various elements of risk are carefully orchestrated and included from as near to the start as possible. They are the ones that will lose out if that does not happen. It is a question of reducing burdens on business, particularly good, well run businesses.
 I am pleased with what the Minister says about the preparatory work that is going on. This is clearly one of a number of areas where it is important to carry business along with what is happening; long may those steps continue. 
 I have a slight concern that an element of self-fulfilling prophecy may be involved. The companies and schemes that are experiencing the most potential difficulties will end up paying a higher and higher levy, if the system works. That will add to their problems. One of the things that Mr. Kandarian was quite proud of when I saw him in Washington was the fact that he had started publishing a list of the 10 most underfunded schemes. That sends a real message to the markets about those companies. It is a bit of a nuclear option because it may shame companies if they 
 have the money—or access to it—to top up their pension funds, but for some it may be the coup de grace that drives them out of business altogether. Therefore it may not be an example to follow, but we will all get on that theoretical bus, bendy or otherwise, in a couple of Thursdays and go to hear what he has to say. Until then, I beg to ask leave to withdraw the amendment. 
 Amendment, by leave, withdrawn.

Nigel Waterson: I beg to move amendment No. 359, in
clause 137, page 84, line 32, at end insert 
 'save that this levy shall not exceed the equivalent of £5 per member.'.
 This is a fairly simple amendment. It is inspired by the NAPF—[Interruption.] Any mention of the NAPF sends the Parliamentary Private Secretary into paroxysms of laughter. The NAPF thinks that there is a lot to be said for setting the initial flat-rate levy at a low and specific rate—it suggests £5 per member—in order for it to benefit schemes with relatively large numbers of low-paid members. There is some merit in the amendment, and I should be interested to hear from the Minister why it is completely wrong-headed and impractical.

Malcolm Wicks: Briefly, we have made calculations based on assumptions about what the PPF will need in its early years. In its first full year after the interim year, it will need about £300 million. We have said that we think that the board can cope financially with half that amount in the first year, and the arithmetic suggests £10 per member. Without that £10 per member, the board would not get off to the financial start that it needs. For that simple reason, we cannot agree with the NAPF's—sorry, the hon. Gentleman's—suggestion of a cheaper £5 option.

Nigel Waterson: I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn.

Malcolm Wicks: I beg to move amendment No. 498, in
clause 137, page 85, line 3, leave out 'is' and insert 'would be'.

James Cran: With this it will be convenient to discuss Government amendment No. 499.

Malcolm Wicks: I ask the Committee to support the amendments because they are Government amendments, which we actually drafted one evening ourselves, as I recall.
 The amendments are technical drafting amendments to clause 137, which provide for the imposition of levies relating to eligible pension schemes. The pension levies will comprise two parts: one levy will be based on scheme factors and one levy will be based on risk factors. 
 Subsection (4) provides that the board may take account of the total annual amount of pensionable earnings of active members of a scheme in calculating the scheme factors levy. That will enable the levy to reflect the size of scheme liabilities and therefore the 
 level of compensation that might be payable in respect of a scheme. For example, should the board choose to implement it, the provision would enable the levy structure to be adapted to reflect the differing liabilities of schemes with predominantly lower-paid workers. 
 The amendments refine the drafting of the definition of pensionable earnings used in clause 137 to ensure that it is workable in practice. It is therefore technical, and I urge hon. Members to accept the amendments. 
 Amendment agreed to. 
 Amendment made: No. 499, in 
clause 137, page 85, line 5, after 'Schedule 7)' insert 
 'if he ceased to be an active member at the time by reference to which the factor within subsection (4)(b) is to be assessed'.—[Malcolm Wicks.]
 Question proposed, That the clause, as amended, stand part of the Bill.

Adam Price: I would like the Minister to clarify—at least in my mind if not in the minds of other Committee members—how the provisions of the clause relate to public service pension schemes. There has been some confusion about how the Bill relates to those schemes because my first assumption and that of many other members of the Committee was that the Bill referred exclusively to private sector defined benefit and hybrid schemes. However, it has emerged during our proceedings that it is relevant to public service pension schemes. In an earlier sitting, I asked mischievously whether the pension fund of the Financial Services Authority would come under the aegis of the new pensions regulator and the hon. Member for Northavon raised the wider issue of other public service pension schemes. The Minister was good enough to write to me on 24 March to confirm that the FSA, as another pensions regulator, will be regulated by the new pensions regulator. As it is an independent body, its public service pension scheme and its occupational pension scheme will be affected by the clause. It will have to pay the levy. Can the hon. Gentleman confirm whether that is the case?
 There has been some confusion about the public service pension schemes that are not covered by Crown guarantee. I am talking about funded schemes as opposed to the large majority of public service pensions, which are unfunded. The civil service pension scheme and most of the NHS pension schemes are paid from the Government's current income rather than out of a separate pension fund. That is not true of all public service pension schemes. 
 Last week, the hon. Member for Tatton (Mr. Osborne) raised the issue of pension schemes of non-departmental public bodies and asked to what extent they would be covered by the PPF. The Minister cited as examples the Arts Council of England, the British Tourist Authority and the Medical Research Council, and said that they would have to pay the levy. There is certainly confusion about the extent to which public service pension schemes, which are funded, will have to pay the levy under the terms of the clause.

George Osborne: When I questioned the Minister about the matter, he did not seem clear about how much it would cost the taxpayer. He suggested in jest that the Arts Council of England could fund the levy by organising a rock opera or a rock ballet, but he could not identify the burden of levy on the taxpayer as well as on public services. I have yet to hear a good answer from the hon. Gentleman about the sums involved.

Adam Price: Yes, indeed. Perhaps the Minister will do the hon. Member for Tatton the same courtesy and write to him about the costs to the taxpayer of the levy as well as to the Arts Council of England or punters of the ballet or rock extravaganza that he has in mind.
 The Minister went on to say that, because the number of organisations involved and their staff members was relatively small, we were not talking about a large sum. Will he clarify whether, for example, the local government pension scheme would come under the terms of the PPF levy? Clearly, that is a large pension scheme and is essentially funded by local funds. It is backed by individual local funds in England and Wales, and there are separate provisions for Scottish local authorities. At the latest triennial valuation, the local government pension scheme in England and Wales had a deficit of £6.2 billion. We need to know whether that pension scheme will come under the terms of clause. 
 Clause 98 refers to eligibility. It simply states that an eligible scheme is 
''an occupational pension scheme which—
(a) is not a money purchase scheme, and
(b) is not a prescribed scheme''.
 Clause 241, which is about definitions, states that an occupational pension scheme 
''has the meaning given by section 1 of the Pension Schemes Act 1993.''
 That Act makes a distinction between public service pension schemes and occupational pension schemes thus: it states that a public service pension scheme is a subset of an occupational pension scheme. 
 My reading of the Bill as drafted is that schemes such as the university superannuation scheme and the local government pension scheme would have to pay the levy. Perhaps the Minister can point out where in the Bill those funded public service pension schemes are exempted from the responsibility and obligation of paying the levy. 
 On those public service pension schemes that the Minister has already admitted will have to pay for the levy, will he clarify the issue of insolvency? Many universities have substantial pension fund deficits for non-academic staff. For example, King's College London has a shortfall of £3.2 million in its pension fund, Bristol university has a pension fund deficit of £4 million and Nottingham and Sheffield have similar problems. 
 How will the risk-based levy be calculated for those public institutions? In the interests of equity and fairness, it would not be acceptable for there to be different standards for assessing the risk-based levy for 
 public institutions and for private sector bodies. Will there be another test—not for insolvency, but some other sort of test for public institutions? I particularly press the Minister for clarification on where in the Bill funded schemes in the public sector are exempted from paying the levy. I cannot find that at all.

Malcolm Wicks: A little while ago, I promised to write to the hon. Gentleman and Committee members about this issue. I have not yet done so, and I apologise for that and for any confusion that that has caused. I will write as soon as possible. In our desire to cover some of the specific schemes mentioned, we are checking one or two facts, and that might be the reason for the delay. I apologise to the hon. Gentleman and to the Committee.
 Essentially, the matter is clear: by definition, eligible schemes are those that could potentially benefit from PPF compensation. We are therefore talking about final salary or defined benefit schemes. Perhaps I should not speculate, but I have a feeling that there has been a movement towards defined contribution schemes in the university sector, so universities may not be included. However, we will clarify the issue in the much-promised letter. 
 The great bulk of those whom we understand to be public service employees will not be subject to the PPF because the Government stand behind them. In that sense—as a generalisation, but only as such—there is a divide between the public and private sectors. However, there are many exceptions. The only public sector schemes that would be covered by the PPF—I said that I was generalising just now—are those without a Crown guarantee. In other words, they could potentially need to call on the services of the PPF. Other defined benefit schemes not funded by a Crown guarantee are not covered. 
 The hon. Gentleman asked me where in the Bill it states who is in and who is out. That is not stated in the Bill; the exemptions will be in regulations under clause 98(1)(b). I promise that the hon. Gentleman will get a letter from me, but some things will be clarified in regulations.

George Osborne: If it is not too difficult a task, will the Minister set out in the notes that he provides to the Committee all the institutions or non-executive agencies that are not covered by a Crown guarantee so that we can see the kinds of bodies that this levy will be imposed upon? Will he also give an estimate of the cost of the levy to the Exchequer or the individual agencies?

Malcolm Wicks: Let me just promise at this stage to do my best to give as much detail as possible in the letter. I will do my utmost to ensure that one or two of the institutions that have been mentioned are covered in it. I do not know whether there are technical reasons why providing a full list is difficult, but I will try to find out.
 In an earlier debate, I waxed lyrical about ways in which the Arts Council, which will be subject to the PPF, might raise funds by staging an extravagant concert. I hope that I will be forgiven if at certain times in this Committee's proceedings I think about life in the terms of a Department for Culture, Media and 
 Sport Minister who goes to the ballet, watches important football matches and so on. 
 Question put and agreed to. 
 Clause 137, as amended, ordered to stand part of the Bill.

Clause 138 - Supplementary provisions about pension protection levies

Nigel Waterson: I beg to move amendment No. 221, in
clause 138, page 85, line 26, at end insert— 
 '(3) The Secretary of State must approve any determination by the Board under section 137(5) in respect of a financial year.'.
 I apologise for not moving amendment No. 222. It did not make much sense when I read it in the cold light of day. 
 On the other hand, amendment No. 221 is eminently sensible. Despite my visceral distrust of the Treasury sticking its oar into a number of crucial areas in the Bill, there is merit in including in these provisions an approval by the Secretary of State in respect of a particular financial year under the levies set out in clause 137(5). Given that he pops up in other parts of the Bill I am surprised that he has not been included here, and I would be grateful if the Minister explained that.

Malcolm Wicks: I cannot account for the hon. Gentleman's prejudices against the Treasury. He should discuss them with a senior colleague to see what Oliver's twist is on that.
 This clause sets out the supplementary provisions relating to the pension protection levies. The 
 amendment provides that the Secretary of State must approve any determination made by the PPF board in relation to the pension protection levies as contained in clause 137(5). That would result in the PPF board not having the appropriate freedom and flexibility to set future pension protection levy rates and structures. It would also result in the Government being seen as providing a financial guarantee for the liabilities relating to the PPF. Our aim in setting up the PPF as a non-departmental public body is to strike the appropriate balance between giving the PPF board the freedom it needs to operate independently and applying the appropriate checks and constraints. To provide that the Secretary of State should approve any determination the board makes in relation to the levy cuts across that intention. 
 We have taken on board the lessons learned from the United States where Congress is responsible for setting the rate of the levy. That has posed political problems for the Pension Benefit Guaranty Corporation in raising the levy sufficiently to meet its liabilities. That has resulted in there being no increase in the levy rate since 1991, and in the PBGC now experiencing severe financial difficulties. To ensure that the PPF is managed prudently and appropriately, we have set in place the necessary constraints and parameters within which the board may operate.

Nigel Waterson: On the basis of that explanation, I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn. 
 It being twenty-five minutes past Eleven o'clock, The Chairman adjourned the Committee without Question put, pursuant to the Standing Order. 
 Adjourned till this day at Two o'clock.